Correlation Between China Merchants and Huafa Industrial

Can any of the company-specific risk be diversified away by investing in both China Merchants and Huafa Industrial at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining China Merchants and Huafa Industrial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between China Merchants Shekou and Huafa Industrial Co, you can compare the effects of market volatilities on China Merchants and Huafa Industrial and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in China Merchants with a short position of Huafa Industrial. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Merchants and Huafa Industrial.

Diversification Opportunities for China Merchants and Huafa Industrial

0.56

Correlation Coefficient

China Merchants  Huafa Industrial

Very weak diversification

The 3 months correlation between China and Huafa is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Shekou and Huafa Industrial Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Huafa Industrial and China Merchants is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on China Merchants Shekou are associated (or correlated) with Huafa Industrial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Huafa Industrial has no effect on the direction of China Merchants i.e., China Merchants and Huafa Industrial go up and down completely randomly.

Pair Corralation between China Merchants and Huafa Industrial

Assuming the 90 days trading horizon China Merchants Shekou is expected to under-perform the Huafa Industrial. In addition to that, China Merchants is 1.04 times more volatile than Huafa Industrial Co. It trades about -0.19 of its total potential returns per unit of risk. Huafa Industrial Co is currently generating about -0.19 per unit of volatility. If you would invest  672.00  in Huafa Industrial Co on November 29, 2024 and sell it today you would lose (107.00) from holding Huafa Industrial Co or give up 15.92% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

China Merchants Shekou  vs.  Huafa Industrial Co

China Merchants Shekou

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Merchants Shekou has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Huafa Industrial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Huafa Industrial Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with China Merchants and Huafa Industrial

The main advantage of trading using opposite China Merchants and Huafa Industrial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Merchants position performs unexpectedly, Huafa Industrial can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Huafa Industrial will offset losses from the drop in Huafa Industrial's long position.

The idea behind China Merchants Shekou and Huafa Industrial Co pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.